Appendix 2: Letter from the Office for
Budget Responsibility |
Re: Treasury Select Committee report on Budget
I am writing in response to the recommendations the
Committee raised in the above report, which relate to the work
of the OBR.
We are glad that you find our scenario analysis useful.
We have always emphasised the uncertainty around our central forecast
and the importance of analysing the potential impact of different
outcomes on the public finances. The aim of the scenarios is not
to pretend that we can identify a small number of outcomes that
would reflect the entire probability distribution of potential
outcomes, but rather to test the importance of particular judgements
in the central forecast that cannot he addressed simply through
mechanical sensitivity analysis. The choice of scenarios is informed
by the issues being debated in the wider forecasting community,
including at the TSC. Unfortunately scenarios are time consuming
and have to be worked up late in the forecasting process, so we
are very constrained in how many we can include in each Economic
and fiscal outlook. We intend to provide further detail on the
construction of our fan charts, scenarios and sensitivity analysis
in a briefing paper to be published this summer.
We have always recognised the significant uncertainty
around estimates of the output gap. We have stated that it would
be unwise to base an assessment of economic prospects on the belief
that any single approach will consistently deliver the 'correct'
answer (even if we could be sure after the event what the correct
answer was). Recognising this, we report how our central estimate
of the output gap compares to those of other forecasters using
different methods. And we undertake sensitivity analysis to show
how different estimates of the output gap would affect the outlook
for the public finances and the Government's chances of meeting
its fiscal rules. In our paper Estimating the UK's historical
output gap, published in November 2011, we analysed a number
of other approaches such as filters and production functions.
We will continue to keep our central approach to estimating the
output gap under review and will also continue to make comparisons
of estimates derived using different methodologies.
We note your recommendations on working with the
ONS on the measurement of company surpluses and with the Bank
of England on reflecting the Financial Policy Committee's macroprudential
tools in our forecast. We are in contact with both institutions
on these issues and will work with them further ahead of our next
Robert Chote, Chairman, Office for Budget Responsibility
12 June 2012